Canada annual inflation negative,1st time since '94

By Randall Palmer

3 Min Read

<p>An arrow points down on the stock quotation board at the Australian Securities Exchange (ASX) in central Sydney October 28, 2008.Daniel Munoz</p>

OTTAWA (Reuters) - Canada's annual inflation rate turned negative in June for the first time since November 1994, posting its biggest downward turn in more than half a century on a slide in energy prices, Statistics Canada said on Friday.

Consumer prices fell by 0.3 percent as expected from a year earlier primarily because of a 19.0 percent drop in energy prices. It was the largest annual fall in prices since the 0.7 percent decline registered in August 1955.

The inflation rate was far weaker than the Bank of Canada's target range of 1 percent to 3 percent annual inflation.

But the central bank's core measure of inflation, which strips out volatile elements and is used to track underlying price trends, was close to the midpoint of that target range, at 1.9 percent.

"The only real hit, that's more of a psychological one, is that inflation is now technically in deflation mode," said Eric Lascelles, chief economics and rates strategist at TD Securities. "That's the psychological impact but beyond that nothing is all that surprising."

Because the report was in line with forecasts there was little market reaction. The Canadian dollar traded at C$1.1173, or 89.50 U.S. cents, compared with C$1.1178, or 89.46 U.S. cents, just before the data.

On a monthly basis, consumer prices rose by 0.3 percent in June, compared with May, and core prices were unchanged. The annual and monthly figures for both total and core inflation matched forecasts in a Reuters poll.

The Bank of Canada had in April telegraphed its expectation of negative annual inflation in the second and third quarters, before returning to to positive territory in the fourth quarter.

"We're likely only to have negative inflation ratings for a few short months before we move back close to where the Bank of Canada would be comfortable with," said BMO Capital Markets deputy chief economist Doug Porter, noting that the move had been caused by gasoline.

"It makes for great headlines that the overall inflation rate has dipped into negative territory for the first time since 1994 but the fact is that core inflation has been surprisingly stubborn and has moderated only slightly. If anything, core inflation has been above what the Bank of Canada has expected."

Gasoline prices fell 24.3 percent between June 2008 and June 2009. Natural gas and fuel oil also fell.